Tea Party Economist
by Gary North: The
Central Fact of the LIBOR Rate Scandal
"untouchable" means something different in India than it does in
the West. In India, no one wants to be an untouchable. In the West,
achieving the status of untouchable is the supreme organizational
untouchable status means that you cannot move up. In the West, it
means that you can't be pulled down.
In every Western
nation, certain institutions are untouchable. Anyone challenging
them is regarded as a revolutionary, a kook, or a self-promoter
looking for publicity.
status means that the organization gets a free ride in society.
Its mistakes are overlooked. Its deviations from established standards
are overlooked. It is immune from the usual criticisms that all
other institutions are subjected to.
Party in the Soviet Union had this status. So did the Politburo.
are at the center of the social order. They are immune from politics,
because they are the basis of power. The famous Powers That Be,
whose interests are linked to the success of these institutions,
have such influence that they can bring socially effective pressure
against those who go on the attack against these organizations.
It is considered
unthinkable that society could function without an untouchable institution.
The organization is so deeply ingrained in the thinking of the intelligentsia
that leaders are literally unable to imagine how society could exist
be obscure bureaucracies that are never criticized in print. This
is because they have so little influence that almost no one knows
of their existence. This is not what I mean. I am speaking here
of powerful agencies with large constituencies. They have few enemies.
They are not subject to budget cuts. There are no rival constituencies
that would be happy to see them shut down.
Yet at some
point in a nation's history, society and politics did without every
presently untouchable organization. It was not only not untouchable,
it did not exist.
two such organizations in the West today: the public school system
and the central bank.
famous proponent of compulsory education in the West was Martin
Luther. Scottish Calvinists passed a law in 1616. Compulsory attendance
and tax funding of poor parents were made mandatory thirty years
later in Massachusetts. But the law was not enforced widely for
two centuries. Then Unitarians gained control over Massachusetts
politics. Congregational churches were disestablished in Massachusetts
in 1833. The statewide public school system began four years later.
A new established priesthood replaced the older one.
It is no more
possible for the average American to imagine America without tax-funded
schools and compulsory attendance than the average resident of Massachusetts
in 1650 could imagine a holy commonwealth without tax-funded churches
and compulsory attendance. Yet such a world came when a majority
of people finally changed their minds.
That Be do not send their children into compulsory tax-funded schools.
At least 140 years ago, they created a separate school system in
the Northeast, modeled along the lines of the private schools
called public in England. Their children have never mixed
with the common people.
at the top buy their children's way out. They make sure that the
youth of the masses spend a dozen years in the propaganda mills
whose curricula materials are designed or at least certified by
professors at Columbia, Harvard, Yale, Chicago, Stanford, and the
other Ivy League universities. The means of social control are in
their hands, but their children are not under the authority of this
It is the same
throughout Europe. The power elite maintains control through the
compulsory school systems which their wealth allows them to escape.
It is possible
to criticize the public schools' methodologies and pedagogies. Reform
fads come and go like mayflies. But the following do not go: (1)
tax funding, (2) compulsory attendance, (3) falling test scores,
(4) increased percentage of budgets for administration, (5) teacher
certification by accredited universities, (6) rising violence, (7)
student boredom, (8) increased drug use, (9) and the sacred religion
the established churches of the West were subjected to reforms from
the inside. New theologies came and went. New preaching styles came
and went. What did not go was bureaucratization. The best book on
American church practices is The
Churching of America. The authors show that tax funding
and political favoritism undermined established churches. When the
funding and the favors ceased, they could no longer compete.
The mark of
untouchable status is the phrase, "Without [x], it would not be
possible to. . . ." Yes, it would. And, sooner or later, it will.
more critics of central banking today than there were in 2007. There
were more in 2007 than there were in 1997. And so it goes, decade
by decade. There is growing criticism, but not in high places.
century was the century of central banking. Almost every nation
had a central bank in 1999. Monaco didn't, but it is one large private
gambling casino. It does not need a central bank.
is untouchable. Except for Austrian School economists and fiat money
Greenbackers, no one calls for the abolition of central banks. To
get involved in opposition to central banking is like applying for
membership in the Black Helicopters Society. (Note: do not search
Google for "YouTube" and "black helicopters." Do not view these
videos, especially the ones run on local TV news programs. If you
talk about these videos, people may conclude that you oppose the
Here are three
places where you will not see criticism of the Federal Reserve System
as the enforcer and the insurer of the cartel of large commercial
banks: (1) college-level textbooks on economics, (2) financial media
outlets, (3) Congress.
is in charge of the FED. Yet it has yet to audit the FED, with a
comprehensive audit of the gold holdings. It does not set policy
for the FED. "Where is the government's gold?" "In our vaults."
"How do we know?" "Trust, but don't verify."
of Governors of the FED is the only governmental agency that is
legally independent of the government, and is praised by the nation's
opinion leaders for this independence. That is to say, the FED is
the most anti-democratic agency in the country. It is not just that
politics has no control over it. This is operationally true of most
of the federal government, day to day. It is that, as a matter of
principle, those who proclaim democracy as a religion of social
healing are on the side of an agency that supposedly regulates the
nation's central economic institutions commercial banks
which is itself controlled by the largest banks.
guard the henhouse. The largest banks were bailed out. Bernanke
promised the banks $16 trillion worth of back-up in 2008. Yet in
the Senate, only independent Senator Bernie Sanders bothered to
look into this. He
is the source of the story.
Here is an
institution whose publicly appointed agents are paid by the government,
yet whose 12 regional banks are privately owned, and no one in Congress
knows by whom. These 12 regional banks have the power of civil governments,
yet they are immune from civil government. No Congressman or local
politician dares call for public representation on their boards.
There is no other institution like this in the nation. Yet this
is the third incarnation of the American central bank.
saw fit to fight the Second Bank of the U.S. in 1832. He won politically.
The government refused to re-charter it in 1836. Yet in every textbook
that discusses this battle, Jackson is criticized for this action.
He is treated as an economic ignoramus. He was a gold standard ideologue
as no President ever has been, yet he is dismissed as a fiat money
representative of indebted farmers.
When an institution
that was self-consciously established to violate the official religion
of the civilization democracy and the priests and
acolytes of this religion praise it to high heaven, you can be sure
of this: its origin was not in high heaven.
Creature from Jekyll Island.
CRITICS OF THE FED
Reserve System has enemies today. This is due almost entirely to
Congressman Ron Paul. His tireless criticism of the FED began from
the week he was sworn in back in April of 1976. He wanted to see
the FED abolished before he was elected to Congress. He still does.
But he is still alone in Congress on this issue.
been a few critics of the FED in Congress. They did not have national
constituencies. They were not elected for their views on the FED.
One of them
was Howard Buffett of Omaha, who had served several terms from 1942
to 1952. He was a gold standard man. He was a free market proponent.
He did not persuade Congress. He did not even persuade his son.
two other Congressional critics of the FED in 1943, when Buffett
was sworn in. These two critics were Greenbackers. The Greenback
movement began in the 1870s. These people have always been on the
fringes of American politics. They are advocates of pure fiat money
issued by the federal government. They got their name from the green
paper bills issued by the Union in the Civil War. They oppose the
gold standard. They oppose banks. They oppose the FED.
One FED critic
was a Texas Congressman, Wright Patman. He really hated the FED.
He was a Greenbacker. He wanted Congress to control money, issuing
greenbacks on its own authority, and paying no interest on the national
debt held by a commercial bank. He was thrown out of his position
as chairman of the House Banking Committee in 1975. He died in office
almost exactly when Ron Paul was sworn in. Patman had served since
1925. He became legendary for a question directed to Arthur Burns,
FED chairman under Nixon. "Can you give me any reason why you should
not be in the penitentiary?"
War II, Patman and Congressman Jerry Voorhis of California inflicted
the greatest wound ever suffered by the FED. They got a law passed
that forced the FED to pay back most of the interest paid to the
FED by the U.S. Treasury. The Treasury since 1914 had been paying
interest to the FED's privately owned banks, despite the fact that
the FED bought these IOUs with fiat money. This rip-off had been
the greatest cash cow in American history from 1914 until World
War II. Wikipedia comments in its article on Voorhis.
advocated the purchase by the Federal Government of the stock in
the Federal Reserve Banks, which was held by the member banks, as
a way of financing government expenditures and briefly got President
Roosevelt to support the measure until the President's advisers
caused Roosevelt to change his mind. Voorhis later allied with future
House Banking Committee chairman Wright Patman to force Federal
Reserve Banks to pay most of the interest they earned on federal
securities to the U.S. Government, rather than to the bank stockholders.
This was one
of the most important political triumphs of economic logic over
crony capitalism in America's history. Yet the story is unknown.
There is no monograph on how Patman and Voorhis pulled it off. There
is dead silence on this event in the history books.
a Greenbacker who wrote a book on this: Out
of Debt, Out of Danger. Richard Nixon defeated him in the
1946 election, when Republicans regained control over Congress.
With the overthrow
of Patman in 1975, the Establishment believed that it had silenced
the last Congressional critic of the FED. Then, a year later, Ron
Paul showed up.
The best laid
plans of mice and men. . . .
QE3 TURNS INTO MASS INFLATION
At some point,
the FED will once again expand the monetary base. At some point,
commercial banks will start lending. If they don't, then America's
businesses will never escape from the turndown that has produced
over 8% official unemployment. This is the weakest recovery in the
post-World War II era. The FED's ad hoc hyperinflation of the monetary
base has not led to anything like a recovery. It has pushed on a
It can goose
the economy at any time. It can adopt a new rule that all excess
reserves held by the FED will be subject to a 5% fee per annum.
Banks overnight would pull back their reserves and start lending.
The M-1 multiplier would skyrocket, and hyperinflation would rear
its ugly head. The FED knows this, so it does not do it. It is muddling
through. All it needs to do is sit tight. Ron Paul will soon retire.
looms, despite Bernanke's assurances to the contrary. The fiscal
cliff looms on January 1: the expiration of Bush's tax cuts. The
prospect of an annual deficit approaching $2 trillion looms. Social
Security is running a deficit. Asia may stop buying Treasury debt.
term as chairman ends on the last day of January 2014. If he can
tough it out until then, he gets the money monkey off his back.
He can go back into the shadows. He can stay on the Board of Governors,
or he can return to Princeton's tenured safety.
At some point,
his successor must decide: hyperinflation, or Great Recession III,
or Great Depression II.
(20% to 25%) will be a defeat for the FED. But either hyperinflation
or Great Depression II will be an even worse defeat. Yet these are
The FED will
try to play the boom/bust game one more time. This has worked for
60 years. But the annual deficit was not $1.2 trillion. Social Security
was not in deficit mode. The Baby Boomers were not retiring. Foreign
central banks were not holding 40% of the public debt.
successor will not have the wiggle room Bernanke has enjoyed: almost
$2 trillion in purchases of government debt, 2008-2011, but with
almost stable consumer prices.
Over the next
decade, central banks will have their respective moments of truth.
They will be called upon to bail out the West's economies, from
Eastern Europe to China. The deeply confessional religion of fiat
money as the creator of wealth and the guarantor of stability will
suffer from events that do not conform to the confession. As surely
as the voters of Massachusetts in 1833 abandoned two centuries of
established churches, so will voters decide that West's central
banks are liabilities.
It may take
two decades to unseat them, but they will be unseated. Religions
that fail to deliver the goods always are.
Then it will
be the public schools' turn.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2012 Gary North
Best of Gary North